Insurance fraud and money laundering

Money laundering is a challenge that threatens the integrity of financial and economic systems. One sector that is particularly vulnerable to this phenomenon is insurance. By taking out insurance policies, fraudsters can make illegal money legal by taking advantage of the complexity of the products. How is money laundering carried out when taking out insurance policies? What are the risks associated with this practice? What strategies should be put in place to combat this threat? We take a closer look in this article. 

Money laundering: what is it?

Money laundering involves hide the illegal origin of funds by transforming it into legitimate income. This method of fraud allows criminals to use illegally acquired money without attracting the attention of the authorities.

When we talk about money laundering, we generally group it into three stages main : 

• Investment Illegal funds are introduced into the financial system.
• Stratification the smuggler conceals the origin of the funds through often complex transactions. 
• Integration The laundered funds are reintegrated into the so-called legitimate economy. To avoid detection, fraudsters often return the money in the form of withdrawals or guaranteed loans. 

What methods do fraudsters use to launder money when taking out insurance policies?

Insurance contracts are particularly attractive to fraudsters because of a number of features. Here's the lowdown! 

High premiums save time and money!

THE high premiums in insurance contracts facilitate the inclusion of large sums of money in the financial system legally. 

The mechanism is relatively simple: by paying large premiums, often in the form of one-off payments or large instalments, criminals can justify the inflow of illicit funds. They then claim that the funds have come from a legitimate source, such as investment gains or inheritances.

Transfers between different contracts 

Transfers between different insurance policies allow criminals to move funds from one contract to another. This makes it more difficult to trace the origin of the funds. 

This mechanism is often used to cover their tracks and make detection difficult. By manipulating transfers, fraudsters conceal the criminal origin of the funds.

Changing beneficiaries 

Insurance contracts provide for flexibility of beneficiaries which facilitates money laundering. This feature allows policyholders to modify the beneficiaries at their discretionThis makes it easier to transfer funds to third parties without arousing suspicion. 

Fraudsters can use this ability to conceal the illicit origin of funds directing laundered money to apparently legitimate beneficiaries. This practice complicates the task of the authorities responsible for monitoring and investigating suspicious movements of funds. 

Case study: American International Group (AIG)

In 2006, American International Group (AIG)one of the world's largest insurers, has been at the centre of a money laundering case. 

This case involved the use of insurance contracts to launder funds from various criminal activities. AIG's practices came under close scrutiny by regulators, who discovered shortcomings in its procedures for verifying and monitoring customers and transactions.

Illicit funds were concealed by investing in insurance policies, providing a legal front for illegally obtained income. This method enabled criminals to bypass control systems and benefit from tax advantages. 

The AIG affair has had significant repercussions, including significant fines imposed on the company and an in-depth review of its compliance practices. The story also highlighted the importance of insurance companies strengthening their anti-money laundering measures and complying strictly with regulations. 

Risks and Impacts

As we can see from the AIG example, money laundering through insurance presents a number of risks and negative impacts. 

• An iinancial stability Illicit funds integrated into the financial system can destabilise financial institutions if major frauds are uncovered.
• A reputational risk Insurance companies involved, even unwittingly, in money laundering can see their reputation tarnished.
• From legal sanctions and financial Financial regulators impose severe fines and sanctions on institutions that fail to comply with anti-money laundering standards.
• L'erosion of confidence The increase in money laundering activities is eroding the confidence of customers and investors in the financial sector.

How can money laundering be prevented in the context of insurance contracts?

Companies use a number of strategies to combat money laundering in connection with insurance contracts: 

Know your customer (KYC) 

Insurance companies must carry out rigorous checks customer background at the time of underwriting. This includes checking identity, source of funds and financial solvency.

In France, the Sapin II Act requires insurance companies to implement customer due diligence procedures.

According to the article L. 561-5 of the Monetary and Financial CodeIn addition to the above, institutions are required to verify the identity of customers and, where applicable, beneficial owners, as well as the origin of funds. They are also required to report any suspicious transactions to Tracfin, the body responsible for combating money laundering and the financing of terrorism. 

Training and awareness-raising 

Insurance company employees must be trained to recognise the signs of money laundering and understand the legal and regulatory obligations.

There continuing education is therefore essential, with regular, specialised sessions and evaluations to ensure that knowledge is effective and up-to-date.

Investing in document fraud detection tools 

In the insurance sector, investment in tools for detecting fraud documentary is essential to prevent fraudulent activities. 

These advanced tools use sophisticated algorithms to analyse the documents sent by policyholders and identify anomalies or indicators of potential fraud.

At Finovox, we have developed a false document detection solution tailored to the needs of insurers, available in two formats:

• There API solution makes it easy to integrate information via JSON documents, ensuring seamless integration with your existing systems.
• There SaaS solutionThis allows you to examine the documents in detail and obtain detailed explanations of any changes.

These two solutions are designed to complement each other, ensuring rapid and effective implementation to combat document fraud in the insurance sector.

Would you like to find out more about our solutions? Contact our experts for a personalised consultation.